Director Penalties (DPN's) and Deregistered Companies

Several recent court cases and some articles and anecdotes doing the rounds have highlighted the difficulty for some former directors of now deregistered companies, in circumstances where the ATO is pursuing them personally, for liability for the company’s tax and superannuation debts, under the ATO’s extensive DPN powers.

To refresh, a “DPN” is a Director Penalty Notice. These are used by the ATO when pursuing directors for the unpaid liabilities of a company.

The DPN mechanisms work as follows - A company director is responsible for ensuring that a company reports and pays its tax and superannuation obligations on time. A director becomes personally liable for PAYG, GST and super obligations that are unpaid by the company after the due date. The penalty is automatically imposed on each director of the company as soon as the company fails to pay the debt by the due date. The penalty is equal to the amount not paid by the company.

Whether or not a DPN is issued, a director has personal liability for the company’s debt that was not paid on time. However, the ATO cannot take recovery action against the director until 21 days after it has issued a DPN, and the DPN is not complied with.

There are 2 types, a “regular” DPN and a “lockdown” DPN.

If the company reports to the ATO on time, but fails to make the payment of its tax, this will be a non-lockdown penalty, and the ATO may issue a regular (non-lockdown) DPN. Following receipt of that DPN the director has 21 days to take certain steps to avoid the liability for the penalty. Those steps include:

•   Pay the debt
•   Appoint a Liquidator, Administrator of Small Business Restructuring Practitioner.

If the company failed to pay it’s obligations, but also did not report within the following timelines:

•   For PAYG and GST - within three months for the due date for lodgement,
•   For superannuation - by the due date for lodgment of a SGC Statement (which is one month and 28 days after the end of each quarter).

Then it will be a “lockdown” penalty, and the director can not avoid the penalty, other than for the debt to be paid in full.

So, getting back to the original point... Can the ATO issue DPN’s and pursue directors where the company has been deregistered (whether voluntarily or by ASIC for unpaid fees), or even where the company has previously been placed into liquidation?

The short answer is, Yes!

Allowing a company to be deregistered, and even in some cases, liquidating it (even if the liquidation has been finalised), will not always make that director’s personal liability for the penalty go away.

It is worth noting that anecdotally, particularly during and shortly after the period of the covid-19 pandemic, there appeared to be an assumption amongst some directors and possibly some accountants or advisors, that allowing a company to be deregistered, often by ASIC for failure to pay an annual registration fee, may have seen some of the skeletons in the closet (AKA unpaid and undisclosed Tax and Super debts and reporting obligations) safely and securely buried. During that period there was certainly a huge increase in the number of de-registrations occurring (both voluntary as well as forced by ASIC), whilst at the same time the number of formal insolvency appointments (such as liquidations) plummeted.

It is now being clearly shown that those views and decisions were probably ill-advised. Many of those directors may now face the consequences, with the ATO actively pursuing those directors for personal liability for those debts.

When the ATO issues a DPN in respect to a deregistered company, it is no longer within the power of the former director or shareholders to appoint a liquidator. So if a “regular” DPN is issued, it may be very difficult for the relevant individuals to comply with the DPN in that way. Some of the recent cases on the issue have involved impacted individuals seeking urgent court orders to have a company re-registered with ASIC, and then immediately liquidated, in order to avoid the consequences of failing to comply with the DPN. These applications are always urgent given the short time frame of just 21 days from date of issue, to comply with the DPN. Even if successful in obtaining those orders made in time (and hence avoiding the personal liability), you can imagine that the costs of all of this would not be cheap!

Making things even more difficult for directors, given the age of some of the debts that the ATO is chasing, and particularly in cases where the entity was previously liquidated, there may no longer be books and records available for the director to review and assess whether there may be any other defence available and also to verify that the ATO calculations are actually correct (noting also that the ATO does have power to generate a deemed assessment based on historical data if the company has not complied with it’s reporting obligations).

And it is clearly the case that the ATO isn’t always perfect itself, so it is certainly warranted for a director receiving a DPN relating to years old debts, to want to verify what the debt is, how the personal liability arose and whether it is actually correctly calculated. However, this can be difficult if the relevant records are no longer available.

Adding to the complexities, where the company is deregistered, it may be that the director is no longer the authorised ATO contact person for the company, so the ATO may not even assist the director with their enquiries regarding verifying company lodgements and calculations.

The ATO appears to have limited sympathy for affected directors, as you might expect, and has suggested that directors should take steps to make required lodgements and pay required super and taxes at the appropriate time, and they are continuing the drive to identify these old (but not forgotten) debts and pursuing available recovery rights, such as under DPNs, wherever they exist.

The ATO has issued hundreds of thousands of DPNs in recent years. Many of which were not complied with within the required time frames, and it is to be expected these will now be a tall pile of these case sitting on someone’s desk at the ATO awaiting recovery steps. Numerous examples of Bankruptcy proceedings by the ATO have been seen recently in the Courts, and this may certainly be expected to continue.

So current and even former directors need to be on watch for ATO notices and DPN’s and quickly seek specialist advice from accountants, lawyers or an experienced insolvency professional when required.  Personal insolvency options for directors are an even more specialised than general insolvency, so getting the right advice from qualified specialists is vital. A Registered Trustee will be best placed to discuss the available options for impacted individuals.

As always, where a business is incurring debts and having difficulty meeting all obligations, but in particular with the ATO, the need to act early is more important than ever! 

Robson Cotter specialise in both personal and corporate financial distress and insolvency and are well placed to assist anyone with any queries in this area. Contact us today for a no cost and no obligation chat!